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The harsh reality of the Covid-19 pandemic has driven many people to start making plans for the future, and think carefully about how they want their estate to pass following death.
Reduction in potential Inheritance Tax may be a major factor in the actions people take but there are issues of law to be aware of.
It is well documented that an individual can’t give away their family home and continue to live there rent free, and avoid or reduce their Inheritance Tax liability, but what about a bank account?
The Sillars Case (Sillars & Anor v IR Commrs (2004) Sp C 401)
Consider the case of a mother who transferred a bank account into the name of herself and her two adult children. She continued to deposit funds into the account and generally operated the account until she became ill, at which point, one of the children took over the management of the account.
At the time of establishing the joint account, the mother had intended to make immediate gifts to her two children. Indeed, they each regarded themselves as each owning 1/3 of the account and declared the relevant interest on their personal tax returns.
When their mother died in 2002, the Inheritance Tax Return was completed on the basis that the account had passed to the two children by survivorship and their mother’s 1/3 share was included in the Inheritance Tax calculation.
HMRC held that the whole balance on the account should be included in the Deceased’s estate. This was on the basis that either the mother had a general power of authority over the account (and she therefore had beneficial entitlement under s5(2) IHTA 1984) or there had been a gift with reservation of benefit.
The Special Commissioners agreed with both arguments. The deceased was able to dispose of the balance as she saw fit and there was no accounting to see if she had taken out more than her share.
The Commissioners agreed with HMRC that the account was held beneficially as joint tenants.
Possession and enjoyment of the account had not been assumed by the children because:
As a result, the full balance on the account was included in the estate of the deceased and charged to Inheritance Tax.
A more recent case has confirmed this approach.
The Matthews Case
In the 2012 First Tier Tribunal case of Matthews v HMRC  UKFTT 658 (TC), the deceased had held a bank account in her sole name which held funds inherited from her father. She transferred the whole sum into a new joint account with her son. No further funds were added and the parties each reported 50% of the interest on their tax returns. The passbook stated that only one signature was needed for withdrawals. Each could therefore make withdrawals without recourse to the other.
As with Sillars the Inheritance Tax Return was completed on the basis that the account passed to the son by survivorship and only the deceased’s half share was included.
HMRC contended that the whole amount should be included and the Tribunal, referring to the Sillars case. The gift had been made with reservation of benefit.
HMRC has confirmed its approach at IHTM15042. It regards each account holder as beneficially entitled to the proportion of the account which is attributable to their personal contributions, with withdrawals by each person being offset against their own contributions.
To the extent that withdrawals are made by another joint owner out of funds provided by the deceased, this is likely to be a lifetime transfer.
However, HMRC does make clear that each case should be considered on its own merits.
Specialist tax advice should be taken before any lifetime arrangements are entered into as the consequences of misjudgement or bad advice, can be costly. For any queries on Inheritance Tax, or other personal tax issues, please get in touch.